SPB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended July 3, 2011, and the nine-month period ended July 3, 2011, for Harbinger Group Inc. (HGI). HGI is a diversified holding company majority-owned by Harbinger Capital Partners. The reporting period reflects significant structural changes, including the January 2011 acquisition of a controlling interest in Spectrum Brands Holdings, Inc. (Consumer Products segment) and the April 2011 acquisition of Fidelity & Guaranty Life Holdings, Inc. (FGL) (Insurance segment). The financial statements have been retrospectively adjusted to reflect Spectrum Brands as the accounting predecessor.

Key Financial Metrics

Note: All figures in thousands, except per share data. The Insurance segment contributed $229,655 in revenues for the nine-month period, commencing operations post-acquisition on April 6, 2011.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $382 million (58%) for the quarter and $812 million (46%) for the nine months compared to the prior year periods. This growth is primarily driven by the inclusion of the Insurance segment (FGL) and the Russell Hobbs acquisition within the Consumer Products segment.
• Profitability Turnaround: The Company reported a net income of $193.6 million for the quarter, a significant improvement from a net loss of $51.6 million in the same period last year. The nine-month period showed a net income of $111.6 million compared to a loss of $130.9 million.
• Bargain Purchase Gain: A non-recurring bargain purchase gain of $134.668 million was recognized in the nine-month period resulting from the FGL acquisition, where the fair value of net assets acquired exceeded the consideration transferred.
• Interest Expense: Interest expense decreased significantly to $51.9 million for the quarter (from $132.2 million) and $192.7 million for the nine months (from $230.1 million), largely due to the refinancing of Spectrum Brands' debt and the absence of one-time charges recorded in the prior year.
• Effective Tax Rate: The effective tax rate for the quarter was approximately 2%, significantly lower than the statutory rate, primarily due to the bargain purchase gain (for which no deferred tax liability was recorded) and the release of valuation allowances.

Guidance, Outlook, and Risks

Management Commentary: Management views the acquisitions of Spectrum Brands and FGL as the first steps in a strategy to obtain controlling equity stakes in diversified industries. The Company expects to use proceeds from recent preferred stock issuances ($400 million total) for general corporate purposes, including future acquisitions.

Outlook: The Company does not expect to receive dividends from Spectrum Brands through 2011 due to debt covenants. Dividends from FGL are expected to fund a substantial portion of interest payments on HGI's 10.625% Senior Secured Notes.

Risks and Contingencies:

• Reinsurance Obligations: HGI is required to replace the "Reserve Facility" for FGL by December 31, 2012, and the "CARVM Facility" by December 31, 2015. Failure to do so could result in OM Group foreclosing on pledged shares of FGL. A "Raven Springing Amendment" with Wilton Re is intended to mitigate the Reserve Facility risk but is subject to regulatory approval.
• Debt Covenants: Spectrum Brands is subject to limitations under its 12% Notes indenture because its Fixed Charge Coverage Ratio is below 2:1, restricting its ability to pay dividends or make significant acquisitions until the test is satisfied.
• Regulatory Approvals: The Front Street Reinsurance Transaction, intended to provide capital relief, is subject to Maryland Insurance Administration approval. Failure to obtain approval could trigger a $50 million reduction in the FGL purchase price.
• Legal Proceedings: HGI is a nominal defendant in a derivative action regarding the Spectrum Brands Acquisition. The Company believes the allegations are without merit.

Investor Verification Checklist

• Reinsurance Facility Replacement: Verify the status of regulatory approvals for the Wilton Re "Raven Springing Amendment" and the Front Street Reinsurance Transaction, as these are critical to avoiding foreclosure on FGL assets.
• Debt Covenant Compliance: Monitor Spectrum Brands' Fixed Charge Coverage Ratio to assess when dividend restrictions under the 12% Notes indenture may be lifted.
• Preferred Stock Terms: Review the terms of the Series A and Series A-2 Preferred Stock, specifically the conversion prices ($6.50 and $7.00), the "down round" provisions, and the accretion rates, which impact earnings per share and dilution.
• Valuation Allowances: Assess the sustainability of the released valuation allowances on tax benefits, which significantly impacted the effective tax rate for the period.
• Collateral Requirements: Monitor the collateralization model for the Reserve Facility, as HGI may be required to post significant additional collateral in a short period if market conditions change.